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Centralized Public Utility 
Management 



Development of Stone & Webster's Manage- 
ment Organization in the past Thirty Years 



MR. HENRY G. BRADLEE 

In a Talk to the Convention of Managers and 

Executives of the Management Division 

of Stone & Webster, Inc., held 

in Boston, October 10-18, 

1921 



STONE & WEBSTER, Inc. 









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Stone & Webster were pioneers in the management of 
separate public utilities through a central organization. 
During the last thirty years they have built up gradually a 
system of management which assures proper and uniform 
accounting, good engineering, economical financing, the 
benefit of purchasing in large quantities, proper records 
of the Acts of Corporations, the gathering and dissemina- 
tion of information, the compilation and study of statis- 
tics of operation, the availability of trained men for the 
study and handling of special problems, and the broad 
view and consistent policy impossible to isolated proper- 
ties but indispensable to the most successful operation. 



Financial Showing 

OF 

Public Utilities under Stone & Webster Management 



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Funded 
Debt 

Stock 


19041 05 106 r07 108 r09 no I'll 
3.50 3.50 3.40 3.10 330 3.003.20 3.50 
1.20 1.10 1.20 I.IO I.OO 1.00 1.20 130 


*12 

3.30 
1.60 


'13 rHi'isrie 117 118 119 170 

3.10 3.70 4.00 3.70 330 2.90 280 2.60 
1.50 1.60 1.70 1.60 1.40 1.20 1.20 1.00 


Com. 
Stock 


3.30 310 2.70 2.30 2.10 2.20 2.50 2.40 2.50 2.30 2.70 2.90 2.80 250 2.10 2.00 180 


Total 8.00 770 730 6.50 SAO 640 6.90 720 740 6.90 8.00 8.60 8.10 720 6.20 600 5.40 
DOLLARS OF CAPITALIZATION PER DOLLAR OF GROSS EARNINGS 



THIS PAMPHLET IS ISSUED FOR THE 
INFORMATION OF ALL MEMBERS OF 
THE STONE & WEBSTER ORGANIZATION 
AND FOR ANY OTHERS INTERESTED IN 
THE MANAGEMENT SERVICE FURNISHED 
BY THE ORGANIZATION. 



By Transfer 

iStP241923 



CENTRALIZED PUBLIC UTILITY 
MANAGEMENT 

A talk by MR. HENRY G. BRADLEE 

{Mr. Henry G. Bradlee, of the firm of Stone & Webster, in a talk ^o a 
convention of managers and executives of the Stone & Webster management 
organization in October, 1921, stated the aims, development and accomplish- 
ments of this management. His remarks are published in this pamphlet 
form on account of the general interest in the subject, — a large majority of 
the public utilities of the country being now operated under centralized 
management.) 

MR. CHAIRMAN AND FRIENDS: 

It is a real pleasure to be here and see you all, even though it does 
involve getting on my feet and attempting to give you a talk which will 
not be too uninteresting. I was supposed to speak to you yesterday 
morning, but my senior partners were so long winded that they crowded 
me completely off the stage. It reminds me a little of a story I heard last 
week at the Street Railway Convention. 

It seems that a gentleman was invited to address a gathering and 
was told that he had twenty minutes to talk; so he talked for twenty 
minutes, and then, as he was much interested in his subject, he kept on 
talking. His audience, evidently not as much interested as he, began to 
go out, one at a time, then two and three at a time, until the gathering 
began to get a little thin; emd after he had talked a second twenty minutes, 
he still was not through, so he kept on and talked a third twenty min- 
utes. But his audience grew thinner and thinner, until at last there was 
only one man left. He turned to the one man and said, " My dear sir, 
I am very much pleased to see that there is one man sufficiently interested 
in my speech to stay through it." The fellow looked up at him and said, 
" You darn fool, I wasn't interested in what you said. I'm the next 
speaker! " {Laughter and applause.) 

I am better off than that fellow, because, though you all left, I now 
have you back again. 

I was asked to tell you about the management contract, — what it 
is, why it is, and what has been done under it, — and when I tried to 
figure out what I should say, I found I could speak for many hours without 
exhausting the subject; so I will try to give you only a rough picture of 
some of the reasons which lead up to the contract and some of the reasons 
for its present form. 

In the first place, Mr. Hunt has just said that there seems to be more 
or less ignorance with regard to this contract. The statement was made 
to me a few days ago that in addition to ignorance there was in a few 
cases the thought that there was something secret or mysterious about it. 
There was a vague feeling that it was not a subject on which one should 
ask questions. If any such idea exists it is wholly wrong. There is 
nothing secret, nothing mysterious about the contract; on the contrary, 

5 



it is open to everybody, not only in the Organization but outside the 
Organization, everybody in the United States who is interested in know- 
ing about it. The only thing that we do want you to have in mind is that 
when you take this contract out and show it to people in your local 
community, you should explain to them what it means. It is necessarily 
pretty complicated. We do a great many things for the companies under 
our management, and in order to express these in the contract, we have to 
cover a great deal of ground. There is possibility of misunderstandings, 
and the contract should be explained as far as you may so that every one 
will understand it. The more people understand what we are doing and 
what that contract is, the better for all concerned. 

I want to go back to that tree that Mr. Stone and Mr. Webster sat 
under when they agreed to go into business together. They decided at 
that time to go into the business of engineering. They had in mind in a 
vague way that they might do something in connection with public 
utility work, but for the first three years the business was confined en- 
tirely to construction and engineering. The thought of management 
came later. 

In the early nineties the public utility business was in a pretty bad 
way. The investor was very much discouraged. The net earnings were 
very small and the situation was almost desperate. That gave Stone & 
Webster their opportunity. They were invited by investors here in Bos- 
ton to look over certain properties and try to see if they could not find out 
what was the trouble with them and what should be done to improve the 
properties and get them on their feet. So Mr. Stone packed his bag and 
Mr. Webster packed his bag, and they started off. Before they were 
through, they had looked over something like seventy-five or one hun- 
dred properties, — at any rate, enough so that they had a pretty good 
picture of the industry as a whole. They found out a number of things. 
In the first place, those were the early days of the business. Properties 
were pretty poorly designed; the apparatus, generators, cars, and other 
parts of the properties were as good as could be obtained at that time, 
but they were poorly put together. The system as a whole was not 
properly designed for good public service. It was not designed for 
economy. Practically none of the ideas which we have now had been 
developed at all. There was no thought of the growth which was to take 
place in the future, no thought that there must be a strong financial 
structure to take care of it. The methods of finance were most unfavor- 
able for raising money on a satisfactory basis, and the operation of the 
properties was decidedly uneconomical. Now those properties were all 
small. Even in the larger cities the individual companies were small 
because of competition. Before we became interested in the Seattle 
properties there were in Seattle, I think, eleven street railways and three 
electric light and power companies. When these were all combined the 
gross earnings amounted to only about $700,000. It was pretty clear that 
the one great difficulty of these companies was that they could not get the 
kind of men they needed, the brains and experience which they had to 
have in order to build themselves up. The gross earnings were not such 
that they could afford to have even the proper executives, much less to 
maintain on their forces skilled men who were familiar with detailed 
operations, construction and finance. The one great problem to be solved 
was to find men fitted for their positions whom the company could afford 
to employ. Mr. Stone and Mr. Webster came to the conclusion that this 



could be done only by some form of orgcmized management, which would 
mean a bunch of those compauiies getting together, not necessarily finan- 
cially, in order to get the help that they needed through cooperation and 
the sharing of expense. By doing that, they would be able to get, at a 
reasonable cost, the service, advice and assistance which was necessary, 
and without which they could not get out of the hole they were in. Hav- 
ing this idea in mind they started the management organization. They 
took over the management of a few companies, later increasing the num- 
ber, and working out their organization as they went along. That the idea 
was correct, that it was successful, very few today would dispute. It has 
been developed^throughout the industry, through holding companies and 
management associations such as ours, so that at least 75 per cent of the 
public utility industry in the United States is now under some form of 
centralized management. The system is being used in Elngland, Germany, 
France, Italy, Holland, and other countries, and in these countries the 
methods used have developed along the same general lines as in our own. 
The main difference between ourselves and many others is that we have no 
holding company. Each of our companies has its own financial structure 
cind operates apart from the others, except as they cooperate to secure the 
advantages in construction, operation and finance of the central or- 
ganization. 

Mr. Stone and Mr. Webster had at the start no clear idea as to just 
what form the organization should take, so they left it to time to develop 
that organization and felt their way as they went along. As a result the 
Organization has shifted very materially from its early start. The 
executive end of the Organization has changed, the departments in the 
Boston office have changed. Some that were started were found to be 
undesirable, and as time went on, these were weeded out. Others were 
found to have over-developed; in the enthusiasm of the early start they 
perhaps attempted to do too much, and they were cut down. Others 
that seemed relatively unimportant at the beginning have grown to be 
important branches of our work. 

I will not attempt to go over all the details of the contract, but will 
touch on some of t^e clauses briefly and try to point out just a few of the 
important provisions. 

A Co-Operative Scheme from Start to Finish 

In the first place, the contract starts off as a proposition to the utility 
company, and agrees to supervise, under the direction and control of the 
Company's Board of Directors, the management, development, and 
financing of the Company's property and the property of any subsidiary 
companies which it may control. It agrees to put at the service of the 
company the entire Stone & Webster organization from Mr. Stone down 
to the office boy whenever and wherever any one of us can be helpful. 
The thought is that we should all be drawn in, that it should be our duty 
to help in any way that we can and that it should be our further duty to 
know what the Organization does in each department of its work; to know 
what information, experience, and talent are available; and to be sure 
that these are brought to bear on each important problem as it arises. 
You men in the field ought to know exactly what is available to you in 
experience, advice and assistance, and when you have a problem to solve 
you ought to know how to take it up, so that you may secure the greatest 
help from the Organization, and you should be sure to call for and obtain 



this help. In other words, it is a cooperative scheme from start to finish, 
each one trying to help the other. 

The contract then says that in general, the organization ** proposes, 
under the direction and control of your Directors, to carry on as far as 
practicable the management work ordinarily done by the executives of a 
company, including President, Vice-Presidents, Secretary, and Treasurer, 
and to that end we will designate, as far as you desire, members of our 
management organization to serve as such executives without compensa- 
tion." In most of the companies, members of the Organization fill those 
positions, and in general, it is our duty to carry out the work which would 
ordinarily go with those positions, and yet it is not the idea that those 
individual men are alone going to perform these duties. The idea is that the 
Organization, in so far as it properly may, is going to do broadly the things 
which those officers would do, and it is going to do them better than those 
officers could. 

Two Heads are Better Than One 

The contract next goes on to say that the executive charge of the 
company shall be in the hands of three men: one a Local Manager, one a 
District Manager, and one a Division Manager. There is no particular 
reason for having three men rather than two or four, except that we have 
found that it works best in practice. The idea of more than one man is 
simply that two heads are better than one, and that all problems in their 
initial stage, when considering what it is wise to do or when planning out a 
course of action, can be decided better when two or more men sit down and 
confer and give their mutual thought to the problem than when any one 
man takes it up, no matter how able that one man may be. The mere 
fact that there is a conference brings out many thoughts and many angles 
that would not be evident to one man. There is an advantage, also, in 
the particular way in which the three men are grouped. 

The Local Manager necessarily has his nose pretty close to the grind- 
stone. He is responsible for the operation of the property and should be 
familiar with all its details. He is closely in touch with all local conditions 
and with each wave of public sentiment. He is subject to constant pres- 
sure from individuals or groups desiring extensions or changes of the 
property or its service. Frequently these desires will benefit a few to the 
ultimate disadvantage of the many and should be resisted, but the manager 
desires to retain the friendship and cooperation of all and his position is 
difficult. Under these conditions his judgment may sometimes be warped; 
he may give too much weight to the local side of a question, too little to 
its other phases. He may be over-influenced by pressure brought to bear 
on him and choose a line of action that is immediately expedient rather 
than one that will be of the most permanent and general value. He would 
be more than human if this were not the case. The District Manager is 
a little farther removed. He, too, is near the property but at the same 
time he is in close touch with several other properties and this gives him 
a wider experience, a broader outlook, and a greater freedom from the 
effects of temporary local sentiment. He can view the company's prob- 
lems a little more calmly, a little more judicially, because of his position, 
because he is not so intimately in touch with all its details. The Division 
Manager in Boston is still farther removed. He has a still broader 
experience and outlook and he has the additional advantage of being 
closely in touch with financial affairs not only of this particular company, 
but broadly throughout the eastern section of the country, which is its 

8 



financial center. The idea of having a District Manager in the district 
has been gradually developed. For many years this practice was not 
followed. It results in more prompt action. Questions can be taken up 
more promptly because there is a man near by. Things come up for 
conference which formerly did not. In the past it was necessary for a 
manager to come all the way to Boston every time a conference was 
necessary, or for some one from Boston to go out to the company. Now 
that has been reduced to a more reasonable situation. This duty became 
burdensome; it was a thing which really interfered to some extent with 
the successful operation of the company's business, so the present scheme 
has grown gradually and is working wonderfully well. 

There is no particular division of duties laid out in the contract 
between these three men, with one exception. We have found and have 
always felt that the greatest danger to public utilities was in the develop- 
ment of property. So many properties have suffered and have gone on 
the rocks through unwise extension and development. There must be 
extension. We are working for it all the time, and yet that extension 
must be governed wisely. We must be careful not to extend too far 
beyond the immediate requirements for service. We may make exten- 
sions which will not at the start yield enough to cover the cost of the 
service but only under rare circumstances are we justified in building an 
extension which will be a permanent burden on the rest of the business. 
When an extension is made it must be properly designed and located 
to provide for future growth and development as well as immediate 
lieeds. Otherwise, there will be waste of capital. We must not commit 
ourselves to cmy extension until we know where we are going to obtain the 
necessary capital. Because this subject is so important, there is a provi- 
sion in the contract that all construction work must first be considered by 
the Local Manager, the District Manager, and the Division Manager, 
smd that a recommendation must then be made to the Board of Directors 
of the company and the proposed work authorized by that Board before 
it can be carried on. 

There has grown up a series of departments in the Boston office. 
I cannot attempt to describe them in detail, but I have had a few state- 
ments and figures prepared which perhaps will give you some little idea of 
some of these departments and what they are doing. 

Company Finances and Taxes 

The first department on the list is that of the Treasurer. This depart- 
ment is run by Mr. Nichols under the general direction of Mr. Sawyer. Mr. 
Sawyer is elected Treasurer of each of the companies when so desired. He is 
then responsible for the finances of those companies, legally as well as from 
the Organization stsindpoint, as euiy Treasurer would be. The Treasurer's 
Department works to perform the duties of the Treasurer. It is responsi- 
ble to Mr. Sawyer for the finances ajid cash of each company and it is its 
duty to see that the accounting and the cash are properly cared for. It 
is its duty to borrow the money you may need from banks and to see 
that you are provided with the cash needed for your working purposes. 
The cash which goes through its hands per year amounts to about $60,- 
000,000 which gives a little idea of the volume of the business. The 
members of the department have to borrow considerable amounts of 
money for you. Last year they negotiated 566 loans and borrowed 
$19,000,000. You have 225 bank accounts, the average combined bank 



deposits being about $4,500,000. The Department keeps a record of 
every one of those banks, and follows them from month to month so that 
it may know the conditions of the banks. The minute a bank looks at all 
shaky, the matter is taken up with you or looked into in some other way, 
and if there seems to be any chance of financial disaster, the deposit is 
drawn down or entirely removed from the bank. That in itself has been 
a source of very material saving. Quite a number of banks have failed 
in which we have had money deposited, and in all the years we have been 
working, handling $60,000,000 a year, the total losses to date amount to 
less than $5,000. It has also been the duty of the Treasurer's Depart- 
ment to look after the subject of taxes. That has always involved con- 
siderable work, but since the Government has gone into the tax business 
so broadly, the work has materially expanded. The tax returns at the 
present time number about 1 ,400 annually for these companies. In all 
the tax returns which we have made, there have been claims for additional 
amounts of less than 1 f per cent of the total, and against those claims we 
have had counter claims which have more than offset that 1^ per cent. 
In the case of Federal taxes, there has been the greatest advantage in 
having them handled through a single channel. The tax laws, as you all 
know, are tremendously complicated, and it has been necessary to have 
men here devoting their whole time to nothing but the carrying out of 
those tax laws. Through their familiarity with them, they have been 
able to save our companies a very considerable amount of money. Take 
the one question of depreciation alone. The companies have the right to 
deduct a certain amount for accrued depreciation. When we took that 
up with the Department in Washington, the amount which they would 
have permitted us to deduct was very much smaller than that which 
they finally approved. It took several trips to Washington to get that 
through, and it has taken repeated trips to get them to approve our 
accounts. We have sought always to know the tax laws and to ask for 
nothing that we could not justify. We have tried to prepare our cases 
thoroughly and clearly. As a result, the authorities in Washington have 
granted practically everything for which we have asked. In another 
way, also the Department has been helpful. We had a question come up 
on the tax returns in Seattle and a similar question on the tax returns in 
Houston. In Seattle the decision of the Government meant the largest 
return to the Government; in Houston the decision also meant the 
largest return to the Government, but the grounds for the two decisions 
were exactly reversed. If those companies had been independent and 
had not known what was going on, each might have paid the full amount, 
but the question came to us here; we saw the inconsistency, took it up 
with the Government and secured a satisfactory decision in each case. 

Your Treasurer's Department has in its care all of the securities of 
underlying companies, part of which are held directly and part are pledged 
under mortgages and held by Trustees. These securities amount to 
$167,000,000. The Department prepares statements and estimates of 
all income and expenditures for our executives here in the Boston office, 
for the stockholders, and for the Boards of Directors, and that runs into 
a pretty large volume of continuous work. I asked the Department once 
to give me something that would indicate the amount of work involved in 
a minor detail and was told about coupons. You gentlemen all have 
bonds outstanding on your properties and twice a year the coupons on 
those bonds were paid and the coupons came into this office. Those 

10 



coupons had to be checked up. The Department had to be sure that the 
coupons were in; it had to know what ones were out; it had to know that 
it was not receiving counterfeit coupons; so it had to check up those 
coupons each year, and as they would pile up in considerable volume, 
having been checked up, they were cremated. That one duty involved 
300,000 coupons a year, or about 1 ,000 a day, which were checked by the 
Treasurer's Department. 

The Protection of Skilled Auditing 

The next department is the Auditing Department. You are all 
familiar with its work. It audits your books. It also audits the accounts 
of other companies not connected with our Orgcinization. This depart- 
ment has been very efficient, very thorough, and very helpful in all of our 
work. It is not a department which can be measured in dollars and cents, 
perhaps, as well as some of the others, yet I will try to do so. This 
department during the past ten years has audited for our companies 
transactions approximating $500,000,000. They have found losses due 
to dishonesty of about $25,000. Of that amount, $15,000 has been paid 
back by the dishonest persons or their relatives, and the insurance com- 
panies have had to pay but $10,000 during that ten year period on our 
companies. That is due, of course, to a great many causes. It is due to 
the character of the men in the Organization, to the training they receive, 
to the care with which their accounts are followed. This is reflected in 
our insurance. We are able to secure Fidelity Insurance on any man in 
our Organization at a rate at least twenty-five per cent better than that 
allowed an average company. During that same period of ten years, we 
have made audits of outside companies, and the transactions covered in 
these audits are very much less in volume than those of our own com- 
panies; yet we have found in those companies shortages of $1 50,000. We 
found one shortage that had been accumulating for seventeen years, dur- 
ing which time three audits had been made by other people, who had not 
discovered it. During the war the Auditing Department got rather shot 
to pieces. Some of the men went to Hog Island, some went into the 
Army, and some into other Government work. Altogether we didn't 
have much of a department left. We were unable to carry on the work 
which we ordinarily would do and had to turn to outside auditing concerns 
to do some of our work. When the bills came in from those outside 
auditors, we found that the man-hours spent on the audit were from two to 
three times as great as would have been necessary with our own auditors 
and the work was not as well done. The results were not as satisfactory. 
Not only were the man-hours greatly increased but the charge per man- 
hour was also greater, because, of course, they charged a profit on their 
work. Based on those figures (and they covered the v/ork of three differ- 
ent auditing concerns), it seems clear that the work of our Auditing 
Department, as compared with having the auditing done by outside 
concerns, is saving our companies at least $50,000 a year and possibly 
$100,000. 

Advantages of Centralized Purchasing 

The Purchasing Department you are all familiar with, also, but I 
want to say just a word about its work. There is sometimes a little ques- 
tion as to what purchasing should be done in Boston and what purchasing 
should be done out in the field. There is only one rule: the purchase is 

II 



to be made where you can purchase cheapest. This should be our sole 
guide, but in applying the rule we should consider ultimate as well as 
immediate savings. For example, it may be possible for a company to 
pick up a small amount of copper wire occasionally in the local market at a 
lower price than obtainable at the time in Boston and yet considering our 
copper purchases for a year as a whole we may obtain very much the best 
results and the greatest saving by bunching the purchases of all com- 
panies and obtaining the benefit of quantity buying. In such a case the 
small saving should be sacrificed for the greater unless both can be secured. 

The Purchasing Department in Boston has two advantages over the 
individual companies: one, the great volume of its business; the other, 
the fact that it is closely in touch with the market here in Boston and in 
New York and Chicago, these cities being the headquarters of most of the 
large industrial concerns and the principal general markets for supplies 
and materials. The Purchasing Department secures the great advantage 
of purchasing for all the companies, but it also secures a very much greater 
advantage from purchasing for our engineering and construction work for 
outside clients. I doubt if you realize that of the purchases made by the 
Purchasing Department, only 1 5 per cent are for companies under our 
management. Eighty-five per cent are for clients outside our Organization. 
It is that volume of work that gives the Department one of its great ad- 
vantages. Here again I have jotted down a few figures just to illustrate 
how some of those things go. We place, as you know, bleuiket orders for 
many classes of supplies: meters, transformers, incandescent lamps, and 
things of that t3T>e. It is estimated that the annual savings on these orders, 
as compared with placing separate orders for each of the companies, amount 
to $200,000 a year. On other purchases the saving runs from 5 per cent to 25 
per cent. The saving in some instances comes from merely being in touch 
with the market. An instance in 1919, when we were notified of a prob- 
able rise in the price of copper, shows this. Telegrams were sent out 
to you men in the companies with the suggestion that orders be sent in 
immediately to cover your immediate requirements. The orders came 
in, the rise took place, and we saved on that particular bunch of telegrams 
about $35,000. The next year a lot of orders came in for copper and it 
looked as though the price was going down, so we held the orders up. 
Some of you kicked, but we held the orders just the same. By holding 
up those orders for a short time, we saved $25,000. That is simply a 
small incidental advantage that one may obtain by being in close touch 
with the market and having fore-knowledge of price changes. 

In 1915 we had a chance to place a fuel contract for our companies 
on the New England coast. We placed a joint contract for these com- 
panies for three years. That contract saved those companies about 
$200,000 a year for that period of three years. 

In Texas in 1915 the question of purchasing oil for fuel came up and 
was investigated locally by our local people and by the Purchasing De- 
partment and others in the Boston office. After a most careful study, 
we made up our minds that it was an advantageous time to place a long 
term contract for oil. Another organization interested in other Texas 
utilities made a similar investigation at the time and decided that it was 
not a prudent time to place a long term contract for oil. We placed a 
five-year contract and that carried us through the war. We were offered 
$350,000 to cancel that contract zifter it had been running two years. 
It saved us in 1918 alone, as compared with market prices at that time, 

12 



$700,000. The saving in that year to the Eastern Texas Electric Company 
amounted to 17.6 per cent on its common stock; to the Galveston- 
Houston Electric Railway Company it amounted to 5.9 per cent; and 
to the Northern Texas Traction Company it amounted to 8.2 per cent. 
That contract was a good deal of a life saver during the war. 

The question of routing and tracing shipments is another matter in 
which the Purchasing Department is of material help in securing prompt 
deliveries, in preventing loss, and in securing some recompense when 
damage occurs. In 1918, for which I happen to have the figures avail- 
able, the saving in collected damages from lost or injured shipments 
alone amounted to about $20,000. Similar savings are made each year. 

Training Future Executives 

The Statistics Department, which is the next on the list, furnishes 
us with figures of all kinds. They take the figures which you send in 
from the companies and prepare the quarterly comparative statements 
with which you are familiar, and also many other comparative state- 
ments which are useful to us here in our work. This department also 
serves as a training ground for the young men who go out to the com- 
panies. It gives us a department in which we can start the young men, 
get them in touch with the business and give them a general viewpoint 
of its character to better advantage than in any other department. 

This department has also under its care the records of real estate 
which we must keep that we may be able to handle releases under mort- 
gages, and other legal transactions. It also has charge of the question of 
insurance. It does not seem as though insurance would be a very im- 
portant matter, but it has run into considerable figures. We started the 
Insurance Department, or the insurance branch of the Statistics Depart- 
ment, fifteen years ago. At that time our average rate was $1.52 per 
hundred. At present it is $0.38 per hundred. To translate that into 
dollars and cents, if we were handling our present volume of insurance at 
the average rate of fifteen years ago, it would cost the companies $500,000 
a year more than they are actually paying at present rates. Of course, 
the amount of insurance has increased very materially during that time, 
and you may say that this reduction in rate is due to volume of business. 
That is not so, because the insurance is still carried as it always has been, 
separately for each compemy. You men place the insurance locally. 
You do that for many reasons that are excellent and that make it advisa- 
ble, but if you ever make up your minds to turn your insurance in to us 
and have it placed wholesale, we can save from thirty to forty thousand 
dollars more per year. 

Reducing Legal Expense 

The Corporation Department acts as secretary for the companies, 
one of the members of the department being elected secretary of each of 
the companies when so desired. The department keeps records of all stock- 
holders' and Directors' meetings. It keeps all company records which are to 
be kept in this office. It looks after all of the legal work of the companies, 
the preparation of mortgages, the drawing of contracts so far as they have 
to be drawn here, and all of what you might call the corporate affairs of the 
company. In doing that work the members of the department have 
naturally acquired a familiarity with it which enables them to do it better 
and quicker than we could hope to have it done if it were divided among the 

13 



companies. All of that work has to be passed on by your lawyers. It is 
a rule that the Corporation Department shall never pass on a legal ques- 
tion. The final decision has got to be given by the lawyer. If we took 
those problems over to the lawyer in the first instance, your legal bills 
would be very much larger than they are today: but these men in the 
Corporation Department have been able to get themselves so well posted, 
so well trained, that they can prepare all the papers and documents, — 
mortgages, notes, and everything, — take them over to the lawyer, and 
simply say, "Is this 0. K.? " That means that your legal bills are very 
much reduced, and strange to say, the lawyers like it. They are glad 
to get that detail work out of their hands, even though it does reduce 
their bills. The Corporation Department has under its charge the records 
and documents of something like one hundred corporations. 

A Department of Public Relations 

The Public Relations Department is a very recent one in name. 
It has existed as a department for not more than a year, I believe, and yet 
its work has been carried on in some form from the beginning. The idea 
of that department is to help on questions such as rates to be charged for 
light and power, and street car fares; to help on cases that may come 
up before courts and commissions; to assist in hearings and to help out 
generally on legislation that affects public utilities and on problems of 
public relations. Of course we have done that sort of work always, from 
the start, but recently it has been organized into a definite department 
under Mr. Nash and has been doing splendid work. You gentlemen 
realize fully what that means to you. The question of whether you get an 
increase of 10 per cent in your rates or whether you do not is a question 
of whether your case is well presented or whether it is not, and you know 
how much the result may mean to your company in dollars and cents. 
This department is, and is going to be, one of the most valuable depart- 
ments in our Organization. 

The Filing Department I do not need to comment on. As you all 
know, it has charge of the filing of all Compemy papers and documents 
that are kept in Boston. 

The Transfer Department has charge of the transferring of company 
stock, the payment of dividends and interest, and work of that kind, which 
would ordinarily be handled through a trust company if the department 
were not in existence. There is some direct saving in cost to the com- 
panies through having our own Transfer Department. There is also a 
further material advantage in convenience in handling the transfer work 
and a consequent indirect saving in cost. 

The Securities Department I shall not attempt to discuss at all, as 
Mr. Royce is going to talk about that later. Of course it is a department 
of vital interest to all our companies. We cannot go ahead unless we 
have capital, and the Securities Department is the one that supplies us 
with the sinews of war, — but I will leave that to Mr. Royce to discuss 
later. 

Building up the Personnel 

Last we have the Personnel Department, a department whose results 
cannot be measured in dollars and cents, and yet we all realize that it is 
the most important department of all. It makes no difference what kind 
of a system we have; if we haven't got the right kind of men in it, we never 

14 



will make a success, and to have the right kind of men, we have to start 
at the beginning. We must start with the young men as they come into 
the Organization; we must get the right sort of men and see that they 
have the right sort of training; we must follow them in their work and 
see that they have every encouragement and every help, and that they 
in each case are in the right niche. If they are not in the right niche, 
we must try again and see if we can find the proper place for them, in 
that way bringing the best out of every man we have in the Organization. 
This work was wonderfully handled by Mr. Hovey up to the time of the 
war, as you all know, but during the war it suffered, partly through 
Mr. Hovey's illness euid partly through conditions brought about by the 
war. Our young men left us, very properly, to go into the war or into 
Government work. Other young men were not available, so the work of 
the department necessarily was sidetracked to some extent. Now we are 
t2Jcing it up again and we want to make it as valuable to the Organization 
in the future as it has been in the past and of even more value, and that 
requires not only work here but the utmost cooperation in all depart- 
ments of the companies. You men outside and we here should try and 
see that we obtain the very best possible talent; that we put those men 
in the right positions; that we give them every encouragement in order 
to bring out the best there is in them; and that we give them always the 
feeling that we have their personal interest at heart and are going to see 
that they have an opportunity to go ahead and do the best they can. 
That is, I think, a vital factor in every department of our work, a factor 
on which may depend our entire future success. 

The Management Annual Charge 

Now I am going to skip a little and take up the question of com- 
pensation. This contract is divided under four heads. One is called 
Management, one Consulting Engineering, one Designing and Construct- 
ing Engineering, and one Financing. After describing the services to be 
furnished under each heading the contract takes up the charges made for 
each department of work. I am going to skip the services of the other 
departments for the moment aud discuss the compensation for the ser- 
vices so far described which come under the heading of Management. 

When the Organization first started, it was pretty crude. We did 
not have a large organization, and the charge was made purely arbitrarily, 
in a lump sum. The Firm, in effect, said to the company, " We will 
charge so many hundred or so many thousand dollars a year for such 
assistance as we may be able to give in the management of your property." 
The sum was not very definite. It varied with the size of the property 
and more or less according to what they could afford to pay. If a 
company was making a poor showing, the charge might be made less for 
a time with the idea that it would be increased later when the showing 
improved. That ran along for a little while until we woke up to the fact 
that the total amount we were receiving did not begin to pay for the 
expense we were put to in handling the work. Then we changed and tried 
to put the charge on a basis of cost plus a small salary. That was 
carried along for a while, but did not prove very satisfactory. The 
Organization was not very definite at the time. The work of the engineer- 
ing, construction, and other departments was more or less mixed up with 
management, and we found it very difficult to get at the exact cost, in a 
way which would be satisfactory to us and likewise to the companies; 

15 



so that method was given up and we decided on a percentage basis. The 
charge was based on a percentage of gross earnings, which was fixed 
arbitrarily according to a curve, gradually decreasing as the size of the 
company increased. For the payment as determined by the curve, we 
furnished at our expense all management services, and whatever was left 
over and above the cost of these services, was the compensation of the 
Organization. That went on for a while and then we discovered that with 
the growth of our departments and the development of our work, the 
cost of running the Organization was again greater than the amount we 
received so we had to make a fourth revision, which is the one in effect 
at the present time. The annual charge for management, — that is, 
for the services which I have been describing — is $3,000 a year plus 
2.35 per cent of the company's gross earnings. This is the same for all 
of the companies with a few exceptions. The idea of the $3,000 rather 
than a straight percentage is to increase the net percentage on the small 
companies. Without this provision the cost of services rendered would 
exceed the amount received from the small companies. One company, 
the Puget Sound Company, is on a different basis. This question of 
charge, by the way, has had to stand a good deal of fire. It has been 
discussed by the Board of Directors of every one of the companies, It is 
always put up once a year to the Boards for reconsideration and it is 
always referred to members of the Boards who are in no way cormected 
with our Organization and have no interest in the contract beyond 
obtaining as favorable a trade as possible for the utility company they 
represent. Of course those men are active business men, men of inde- 
pendent judgment, and naturally we have had some different ideas. 
In the case of the Puget Sound Company, the matter was gone into very 
exhaustively and the conclusion reached that the Directors would prefer 
a cost plus salary basis, if we could work it out. We have been able to do 
this of recent years because the duties and responsibilities of each depart- 
ment of our Organization have gradually become more definite and there 
is no overlapping of work between the Management and Elngineering 
and Construction divisions. The Puget Sound contract is therefore 
based on a payment of a considerable part of the expenses at cost, plus a 
payment of eight-tenths of one per cent of the gross earnings. In one case 
(the case of the Tampa Company) there were at one time objections to our 
form of contract because the Tampa Company at that time was making a 
bad showing. There had been a decided falling off in net earnings and one 
of the Directors had the idea that we ought not to be paid a percentage of 
gross earnings but ought to be paid on the net. We said, *' All right. We 
had just as soon be paid on the net as not. You work the thing out and we 
will try it." His committee worked out a scheme whereby we were paid 
a certain percentage of the net earnings. We worked on that basis for 
three and one-half years. The first year and one-half we received less 
money than we would have been paid under the standard basis of charge 
but the next two years the new form of charge was more favorable than 
the old and at the end of the time was decidedly more favorable. We 
then called the situation to the attention of the Board and said we would 
be delighted to continue if they wanted us to, but we thought they ought 
to know how the plem was working out. They promptly changed back 
to the old basis. 



i6 



Engineering and Betterment 

Now I will turn back to the second heading, which is Consulting 
Engineering. The Ejigineering Division furnishes its services in two 
forms: one, to design and construct for us; the other, to furnish advice 
and help on current problems of operation and minor technical engineer- 
ing questions. The contract provides that this division and all of its 
members shall be at your service at cuiy time to assist you in investigating 
any kind of engineering problems that you may have and to assist you in 
working out any details of technical operation or saving in expense. The 
Engineering Division maintains, as you know, a Betterment Division to 
assist in power station operation; it makes inspections of machinery, cars, 
and other apparatus as they go through the shops and factories to be 
manufactured for your use, and it makes appraisals and other engineering 
investigations of your property in connection with rate cases and matters 
of that character. In this class of work we must depend to a very con- 
siderable extent on you men in the field to take advantage of the facilities 
that are offered. To some extent we know what your problems are. 
We know when you can be helped and we try to help you. To a very 
considerable extent you know your problems before we do. You know 
what is up 2Uid what you are facing, and it is up to you to see that you get 
the benefit of all the talent and all the experience that is available here in 
the Elngineering Division. I have a feeling that very much more could 
be done at times along that line than is. 

The work of the Betterment Division, which keeps track of power 
station operation and assists your local engineers in the handling of their 
power stations and the output of power, has been very successful. As 
might be expected, it met with more or less misunderstanding and opposi- 
tion at the start. Naturally, the men in the power stations were a little 
doubtful about having people come in to show them how to operate their 
plants. They thought they knew how themselves; but the net result 
has been that the companies working under the Betterment Division have 
operated about 15 per cent better than they did when the power plants 
were operated under the ordinary power station engineers, and that in 
itself amounts to a saving which was estimated some time ago at about 
$400,000 per year, and it is probably more than that at the present time. 

Factory Inspections 

In regard to factory and shop inspections, the Engineering Division 
has in the field a varying number of inspectors, sometimes as few as ten, 
sometimes as many as fifty, but it has on the average about twenty men 
out in the field, in the factories and manufacturing plants, following 
the manufacture of apparatus of one sort and another. Of course, a very 
considerable pcirt of that work is for companies outside of our manage- 
ment. I shall show you later on that the construction work which the 
Elngineering Division does for companies under our management is only 
about 12 per cent of their total work. At the same time any one of those 
men is available at a moment's notice to help you in looking after the 
proper manufacture of the apparatus which you have ordered, to see that 
the specifications are lived up to, to see that shipments are promptly 
made, and to follow up the shipments when they are in transit and see 
that they are delivered to you promptly and are ready for vour us^ 
when needed. 

17 



The Birney Safety Car 

One outcome of that Inspection Department you are all familiar 
with, and that is the one-man car. Mr. Birney had been for years working 
to improve our rolling stock. He had labored to cut down the weight of 
our cars and their cost, and he had accomplished very satisfactory results. 
We had brought our cars to a lower weight than those of most other 
companies, but we were not satisfied. We discovered that over in London 
and in Paris they were operating motor busses, and those motor busses 
only weighed 350 pounds per seat, while our cars weighed about 700 
pounds per seat, and we couldn't see why if they could build a motor bus 
at 350 pounds a seat, we couldn't build an electric car at 350 pounds a 
seat. So Mr. Birney came in and we had a powwow here in the Boston 
office. At first he was very doubtful. He felt that he had been doing 
everything that possibly could be done, but as always he was a good sport 
and he said, " I'll go out and I'll try to do it "; so he tackled the problem. 
He alone could not have solved it. It was the outcome of the combined 
efforts of Mr. Birney, the men here in Boston, you men in the field, the 
men in the car barns, the master mechanics; all of whom were drawn in 
to help solve that problem, and because of our standing in the industry, 
we were able to secure the support of the leading car builders, the General 
Electric Company, and the Westinghouse Company. Far be it from me 
to detract in any way from Mr. Birney's accomplishment; he did a 
splendid job and is entitled to the highest possible praise, but I am sure 
he will agree with me that he would hardly have accomplished his object 
had he tackled it single-handed; it was because our entire Organization 
was behind him that he was able to draw together all that ability and 
experience, to draw together all the talent of the country on that problem, 
and as a result we got our car, with which you are all familiar. It was a 
fine example of team work and the benefit of a well organized group of 
companies. 

I wonder if you realize what that car means. We have in our own 
companies 457 of these cars now in operation. We estimate the saving 
from the use of these cars to be $1,000,000 per year. But that car was 
not patented. It was given to the industry as a whole and at first the 
industry laughed at it. I was over in New York attending a meeting of 
a committee that was considering jitneys and trying to solve the jitney 
problem when a representative of the General Electric Company came 
into the meeting, full of enthusiasm, and said he had the solution of all 
our problems. He went on to describe the one-man car, which at that 
time had not been much talked about. He had been working with 
Mr. Birney and was deeply interested in the car, but he couldn't get a 
hearing. They ridiculed the idea and said it was wholly impractical, and 
he finally went out thoroughly discouraged and disgusted with the 
whole outfit. That was the sort of reception the one-man car first 
received. At the present time there are 4,300 one-man cars in use, and 
those cars are saving the industry about $10,000,000 per year. That is 
one of the outcomes of our inspection system. 

Consulting Engineering at Cost 

Now to turn again a minute to the question of cost. These services 
furnished under Consulting Engineering are charged for at cost. 
That cost is made up of the actual salaries of the men during the time they 

i8 



are on the work, plus overhead expenses. These overhead expenses, of 
course, include rent, Hght, heat, and office expenses. They also include 
the unproductive time, as we call it, of the engineers. Of course you 
realize that a man on engineering work in an organization has quite a bit 
of his time that cannot be billed out on specific work, time during which he 
is making studies which will be helpful to him in his future work, time 
when perhaps he is not busy, when there isn't any work along his line. 
To cover this unproductive time and meet the full cost of his salary, his 
productive time must necessarily be billed at a higher rate per hour than 
his average hourly pay. After making a study based on all the years 
that we have been in business, and after investigating the same conditions 
in other engineering companies (and we have looked into it in quite a 
number of large companies), we find it works out that the cost of the 
overhead — the general expenses and the unproductive time — just about 
equals the hourly pay roll cost. Sometimes it runs over that; sometimes 
when business is active it runs less, but if it is averaged over a considerable 
period of time, it runs just about equal to the pay roll, so in making out 
the bills for Consulting Engineering the cost is determined by keeping 
track of the hours spent on the work and multiplying the number of hours 
by twice the hourly pay roll cost. 

Designing and Constructing Engineering 

Now we come to the third division of the Management contract, 
which is Designing and Constructing Engineering. I am not going into 
that in detail. Mr. Muhlfeld, I think, is going to talk to you later about 
the Engineering Division, and he will no doubt cover the matter fully 
but I do want to bring out two points. One is to try and give you some 
idea of the extent of the work, not because it is so great, not with any idea 
of being proud of its size, but simply to give you an idea of the amount of 
experience there is in that division that is at your service. The Stone & 
Webster Engineering Corporation was organized in 1906, and since 
that time it (and its successor, the Division of Construction and Engi- 
neering), has designed and constructed work of one kind and another to 
the extent of $623,000,000. Of that amount about $75,000,000 or 12 per 
cent was for companies under our management. Eighty-eight per 
cent of it was for outside clients, concerns with which we have no con- 
nection whatever. The Engineering Division has installed steam power 
stations with a total capacity of 710,000 kilowatts. It has installed 
550,000 horsepower of water power developments now in operation, with 
£ui ultimate capacity in those plants of practically 1 ,000,000 horsepower. 
In addition to doing this construction and engineering work, it has been 
called on to investigate properties operated by others. It has been called 
on to make appraisals of those properties, and incidental to those 
appraisals it has had to examine the properties and their conditions, and 
has seen how they were designed and what sort of results they were giving. 
That has been very helpful in acquiring knowledge of just what other 
people are doing. During the period since 1 906 it has made examinations 
of some 600 utility properties, and has appraised those properties to the 
extent of $3,500,000,000. That covers a good deal of experience, which 
is all available for your service to help you out in all of your work. 

Another thing about engineering and construction. The question 
is sometimes brought up, or the suggestion made, that engineering and 
construction are not a part of management, that they should be separated, 

J9 



and that managers should do one thing and engineers another. Our 
set-up has been criticized because we do both. The people who make that 
criticism should make a more careful study of the public utility business, 
and I want to point out why. Let us suppose you and I want to start 
out in some industrial business. We will say we are going to build a 
cotton mill. W'ell, we build a mill and we produce cloth. We can go on 
with that mill for the next hundred years if we choose, without addition 
and without extension, and go on with it successfully. It may be neces- 
sary to take out the machinery and replace it with some more modern 
type of apparatus, it may be necessary to make other changes, but we can 
go on and carry it through successfully for an indefinite period, provided 
we keep our machinery up to date. We don't have to add and we don't 
have to extend. Suppose we do want to extend. We may add on to that 
building or we may go to a new location and build a new mill, which 
presents a new problem different from the other. We can make that 
extension or build that new mill when and how we please. We can do it 
when money is available and when conditions are favorable. It all 
rests at our own option and in our own power. Just compare that a 
moment with the public utility. 

We all know that public utilities grow and grow rapidly. I have 
some figures showing the growth of the companies under our management 
for a little over twenty years back, and taking the period from the begin- 
ning up to the outbreak of the war, we added on an average each year to 
our properties an amount equal to about 33 per cent of their total gross 
earnings. In other words, the amount expended for addition to plant in 
an average year was equal to 33 per cent of the money that we took in 
during the year from the companies' operations. It varied slightly, but 
never was below 20 per cent at any time during that period. 

What is true of our companies is true of all others. There is never a 
time when a public utility can say that its plant is complete. There is 
never a time when the utility is not making extensions to its lines, its 
power plants, or some other part of its facilities. Elxtension and develop- 
ment is the normal condition of its existence and the day that it ceases to 
extend it ceases to serve the public properly. Moreover the time when 
any particular extension or development must be made is largely beyond 
the control of the utility. When the public demands increased service 
the utility must provide facilities for that service even though capital be 
scarce and the cost of money, labor and material high. How different all 
this is from our cotton mill with its completed plant or its further growth 
at the option of the owner, and how very different are the relations of the 
cotton mill and the utility to the problems of engineering and construction. 

The public utility is a growing organization, like a tree, constantly 
spreading its roots and branches into new territory and into a broader 
field of usefulness. That means that design and construction are every 
day problems, they are as much a part of the every day business of the 
utility as the operation of its power plant. The very process of design 
and construction must be to a large extent continuous. To prevent 
waste of capital and to secure efficient operation the engineer creating 
today's extension should know the present character of the property and 
the history of its development and should be as fully posted as possible 
as to its future requirements. He cannot design merely for the present, 
he must look constantly into the future and see that today's construction 
will tie in successfully and economically with that of next year and of the 

20 



other years that are to follow. To secure the best results under such 
conditions engineering and operation must go hand in hand with close 
and constcint cooperation. In no way can this be better accomplished 
than through a combined engineering and operating organization such as 
our own. 

There is one other thought about the engineering side that it is well 
to have in mind and that emphasizes its great importance. When a 
mistake is made in operation it usually may be corrected quite promptly 
^\iy a change in method or in personnel but this is not true of construction. 
A mistake in design carmot be lightly thrown aside after it has been 
embodied in construction. Capital once invested cannot be again re- 
claimed and though the mistake may result in unsatisfactory and wasteful 
service it probably will not pay to tear down and replace the faulty con- 
struction. The error and its consequences must remain a permsinent 
burden on the property until the addition has lived out its useful life. 
Here again we see the great importzuice of close cooperation between the 
engineer and operator that such mistakes may be avoided. 

In describing the work of the Construction 2ind Engineering Division, 
the mcinagement contract gives first a list of the kinds of work that the 
Construction and ELngineering Division will design and construct. In 
making up that list, the one thought in mind was this. There are certain 
kinds of work that continue steadily at a fairly uniform rate and that 
require no great amount of detail design. The ordinary extensions of 
overhead electric light and power lines is an example of such work. This 
kind of work can be carried on to best advantage by a local construction 
and maintenance force, organized and maintained by the utility. Other 
classes of work cu-e more complicated in design and construction and less 
regular in volume. For these the utility cannot economically maintain 
an independent engineering and construction force but must turn to out- 
side sources for help. 

This difference in character is the basis for the division of design euid 
construction work between the local forces and the Engineering Division. 
There is assigned to each the part that it can best perform and in which it 
can be of greatest service to the utility. In practice it results in a sub- 
stantially equal division between the two. Of the total additions to plant, 
about 50 per cent is done through the Engineering Division and about 
50 per cent through the local org8mizations. The contract describes in 
detail exactly what services are to be rendered and how the cost of the 
work is to be figured, what services of the Construction and Elngineering 
Division are to be included under the fee that is charged and what services 
go into the cost of work. In general, all of the services of our Elxecutive 
Office in Boston and of our District Offices are furnished for the fee and 
other expenditures are charged into the cost. This is all described in 
full detail in the contract so that there may be no misunderstanding. 
The description of the services to be furnished and the method of handling 
the work corresponds almost exactly with the printed form of engineering 
and construction contract under which we do a very large volume of work 
for outside clients. The fee charged varies with the character of the 
work which is divided into three classes, A, B, and C. These classes are 
more or less arbitrary divisions. Class A being work which involves a 
considerable amount of engineering design, such as the installation of a 
power station; Class B is work that involves less engineering, such as a 
car bam or transmission system, and Class C is work that is almost 

21 



entirely construction, such as the laying of railway track. The fee 
charged under those three classes is, for the first $500,000 of work or 
less, 10 per cent in Class A, 8 per cent in Class B, and 6 J per cent in Class 
C. Any part of the work over $500,000 is 7 per cent in Class A, 6^ per 
cent in Class B, and 5 per cent in Class C. Those rates are based on the 
rates which we are charging to outside clients and run slightly less than 
the outside rates. Of course we have a pretty good standard to measure 
the reasonableness of the charge, for you should keep in mind that 88 
per cent of our work along that line is for outside clients and not for our 
own companies. 

Contract May be Terminated at any Time 

The contract for our services winds up with this statement — "If 
at any time you should become dissatisfied with the manner in which we 
are rendering service or should wish for any reason to discontinue this 
contract you are at liberty after thirty (30) days' notice in writing to 
terminate our employment." This provision has occasionally been the 
subject of comment by people who did not understand the situation. 
These people have said — ** That is a very nice sounding provision, but 
of course Stone & Webster control these companies and so as a practical 
matter the contract will never be terminated." That is not true; any such 
statement is based on a misunderstanding of the facts. This point was 
raised at one time by certain representatives of the State of Massachu- 
setts. We placed before these representatives the Stockholders' list of 
each of the companies that was under our management in the State. 
These lists showed that there was no company in the Massachusetts dis- 
trict in which Stone & Webster owned over 100 shares of stock. Prac- 
tically the entire stock was owned by people in no way associated with 
our organization and whose sole interest was to secure the best and most 
efficient management for their property. We had no more control thein 
the man in the moon except as we were able to hold the confidence of 
those Stockholders and make them feel that we were doing a good job. 
You fellows should always have this fact clearly in mind. The holding 
of your own job as well as ours depends absolutely on your ability and 
the ability of the organization to produce results for the properties under 
our care. While Stone & Webster have a larger stock interest in many 
of the companies outside of Massachusetts the same conditions as to 
control hold true for practically every company we manage. We are 
subject to being kicked off the job any day if the Stockholders are dis- 
satisfied. We can retain our position only so long as we serve these Stock- 
holders with loyalty and skill and so maintain their confidence. When- 
ever we fail in either of these qualities we discredit our own organization 
and injure its chances of continued success. 

Now I have covered the management contract and have tried to 
point out a few savings that are made by the departments, enough to 
show that the departments are justifying themselves financially in addi- 
tion to any other merits that they may have. Of course they are all doing 
work which must be done somewhere; if it was not done here in the Boston 
Office, you would have to do a considerable part of it in the local offices of 
the companies. Some of it would have to be done here in any case, — 
the financial matters must be handled here since this is where you get your 
capital. But how about the results as a whole? What have you men 
really been accomplishing all these years? That is a pretty hard question 

22 



to answer. It is pretty hard to get comparative figures between our 
companies and others, but we have some such figures. We are fortunate 
in the state of Massachusetts in having very complete figures of all of the 
Massachusetts public utilities. The Public Utilities Commission has 
been in existence here for a great many years and keeps very complete 
records. We made up just before the war some figures to show to the 
Massachusetts Commission, comparing our companies with others in the 
state of Massachusetts, and because of the complete records, we were 
able to make the comparison with practically all similar ^companies in 
the State. The results are shown in diagrams, which are across the end 
of the hall. 

Some Very Tangible Results 

The first set of diagrams represents the gas companies in the state, 
and that includes all of the gas companies above a certain size, every one 
that is at all comparable with ours. We were operating two gas companies 
in the state of Massachusetts at that time. Our companies are designated 
by name. On the first sheet [Plate 1 ] is shown the maximum net rate 
charged per thousand cubic feet sold, and you will see that our rates are 
with one exception as low as any on the list. The others, following up 
the list, run very much higher. This represents conditions before the war. 

The next sheet [Plate 2] shows the average income per thousand 
cubic feet sold. Here we do not show quite as well, because some of the 
companies had a much larger industrial gas business thcin ours and this 
tends to bring down the average rate but still we are well down to the 
bottom of the sheet and show an average rate well below that of most of 
the other companies. 

On the next sheet [Plate 3] we show total operating expenses less 
taxes and residuals per thousand cubic feet sold. You will see again that 
we are down near the bottom of the list* 

On the next sheet [Plate 4] we show the expenses for manufacture 
and purchase of gas less residuals per thousand cubic feet sold, and there 
eigain we are well down at the bottom of the scale. 

On the next sheet [Plate 5] we show the gas sold per capita, and 
there you will see we are well up on the scale. 

The next sheet [Plate 6] shows the capital stock, premiums, bonds, 
and notes outstanding on the properties per thoussmd cubic feet sold, and 
there again we are down near the bottom. You will see that fully half 
of the companies at the top have more than twice the capital outstanding 
on our companies. In Massachusetts we have had Commission regula- 
tion for over thirty years, and during that entire period there has been no 
stock issued at less than par of any kind. All of the bonds or stocks 
issued in Massachusetts for the last thirty years have been issued for par 
or for par plus a premium, so the amount of capital stock, premium, 
bonds, cmd notes outstanding is an indication of the money that has gone 
into the properties. 

The next set of diagrams shows similar figures for electric light and 
power companies, and our companies in this case are Abington and Rock- 
land, Brockton, and Lowell, The first sheet [Plate 7] shows the meiximum 
net rate charged per kilowatt hour. Abington and Rockland supplies 
a very widespread district, very largely residential and to a considerable 
extent a purely summer community, so it has some disadvantage. Still, 



23 



it is fairly well down the scale, while Brockton and Lowell are practically 
at the end of the list. There are only two lower. 

The next sheet [Plate 8] shows the average income per kilowatt 
hour from the sale of electricity, and here again you will find us pretty well 
down on the scale. 

The third sheet [Plate 9] shows the total operating expenses less taxes 
and sale of steam expense per kilowatt hour. Here Abington is fairly 
high. Lowell and Brockton are low, but in the Abington figure there is 
included the fixed charges on the power plant of the Brockton company 
because the Abington Company buys its power from Brockton. 

On the next sheet [Plate 10] we have the cost of manufacture and 
purchase of electricity per kilowatt hour sold. There again Abington is 
high because it has fixed charges in its cost. Lowell and Brockton are 
well down at the bottom of the list. I want you to notice the upper half 
of those lists and see how much those companies overrun our costs. 

The next sheet [Plate 1 1 ] shows the amount of electricity sold in 
kilowatt hours per capita. Here again we stand well as compared with 
the other companies. The reason that G)mpany T T shows so abnormal 
a figure is that the community served by this company suffered through a 
conflagration. The entire manufacturing district was burned out and so 
the company was able to do at one fell swoop what we are doing gradually. 
We are gradually taking on in our companies the power that is being pro- 
duced in mills and other manufacturing plants. As the mill plants wear 
out, instead of putting in new plants, most of them are going onto our 
system. In the territory served by Company TT all those plants were 
destroyed at one blow, so the company had a chance to go in and develop 
a plant on the basis of feeding practically all the mills when they were 
rebuilt, and that is the thing we are heading for. We are going to do 
that, but we are going to do it gradually where Company TT did it 
quickly. 

The last chart [Plate 12] shows the capital stock, premiums, bonds, 
and notes outstzmding on our properties and on the others. There 
again we are well down on the list. 

Those charts show that we are turning out a large volume of current 
and a large volume of gas; that we are giving the public a large amount of 
service per capita; that we are giving it at low rates; that we are operat- 
ing at low costs; and that our investment costs are very low as compared 
with other companies. 

I would like to show you a similar comparison covering the entire 
country and our entire group of utilities. I am sure the comparison would 
be equally favorable. Unfortunately records have not been kept in 
many other states as in Massachusetts, so the figures are not available. 
We have, however, secured some information during the war which 
throws light on this question and which, I am sure, will be interesting 
to you. 

Some Interestin§ Comparison 

During the war the utility industry was, as you know, up against it 
pretty hard. Realizing the situation a meeting of utility executives was 
held in New York, which resulted in a committee being sent to Washing- 
ton to try to secure relief. When this committee conferred with members 
of Congress and with executives in various government departments they 
were told that no relief could be hoped for until facts and figures were 

24 



prepared and presented showing the exact condition of the industry as a 
whole and why relief was needed. The committee had no such figures so 
they returned to New York and attempted to compile them. As a result 
of their efforts figures were obtained and tabulated from utilities having 
combined gross earnings of about $400,000,000, this being about one 
quarter of the earnings of all utilities in the country. These figures would 
have been fairly representative of the entire industry but for two facts: 
First: The information obtained was principally from large 

compcinies and from groups under common management. 
Second: There was included a greater percentage of lighting and 
power companies than street railway companies. 

The showing was, therefore, more favorable than would have been 
the case had all utilities been included. It represented the best quarter 
of the industry rather thcin the average. Information was obtained from 
most of the principal groups of utilities under common mginagement, 
and we were told that of these groups only one showed an increase in net 
earnings in the year 1917; that one was the group under your charge, the 
group that you are managing. 

The information covered the years 1914, 1915, 1916 and 1917. 
It is interesting to compare the combined operating ratios of the large 
group, which represented the industry as a whole, with the corresponding 
ratios of the Stone & Webster group for these four years. In 1914 operat- 
ing expenses of the large group were 62.2 per cent of gross earnings while 
the Stone & Webstergroupoperatedat 56.5 per cent; in 1915 the large 
group showed 61.3 per cent, the Stone & Webster group 57.4 per cent; in 
1916 the large group showed 62.6 per cent, the Stone & Webster group 57.6 
per cent; in 1917 the large group showed 68.3 per cent, the Stone & Web- 
ster group 58.0 per cent. Our companies had an advantage in operating 
ratio over the large group of 5.7 per cent in 1914, 3.9 per cent in 1915, 
5.0 per cent in 1916, and 10.3 per cent in 1917. In considering these 
figures, please bear in mind that we have a larger percentage of street 
railways in our group than any other group in the country, and that this 
should naturally make our showing less favorable. 

Translating these percentages into dollars and cents, if our com- 
pauiies had operated at the same ratio as the large group, the operating 
expenses of our companies for these four years would have been about 
$7,000,000 more than they actually were, an increase of about $1,750,000 
per year. We believe that our companies are now making an even better 
showing and are saving about $2,500,000 per year as compared with aver- 
age operation. If this annual saving were capitalized on an 8 per cent 
basis, it means that the Stone & Webster companies when operated under 
your charge are worth $31,000,000 more than they would be if operated 
under average mzmagement. 

Now let us look at net earnings and see how they ran during a part 
of the war period. Comparing the year ending November 30, 1917, with 
the year ending November 30, 1916, the net earnings of the larger group 
DECREASED 5.3 per cent, the Stone & Webster group INCREASED 
12 per cent. During the six months ending June 30, 1918, as compared 
with the corresponding six months of the preceding year, the net earnings 
of the larger group DECREASED 10.7 per cent, the Stone & Webster 
group INCREASED 11.7 per cent. In 1904 we were operating utilities 
with gross earnings of about $9,500,000 and thought we were doing pretty 
well with an operating ratio of 65.3 per cent. In 1920. with all of our war 

25 



troubles and with all of the difficulties in some of the companies, our 
combined operation ratio was 63.0 per cent or less than it was in 1904. 
These figures make a wonderful showing for the war period; a record of 
which you men may well be proud and for which we offer our sincere 
congratulations to every member of the Organization. We have had 
tremendous difficulties to overcome; these I do not need to recount, for 
you are all familiar with them. We have had to meet an unprecedented 
situation, a situation which probably never can occur again — we cer- 
tainly hope so — and yet we have come through with a gain, an improve- 
ment which stands out in a most striking way when comparison is made 
with the rest of the industry. 

I want to call your attention next to this diagram [Plate 13] that 
some of you may have already seen. It compares the results obtained 
by the steam railroads of the country during the war with the results 
obtained by the Stone & Webster properties. The horizontal lines on the 
left of the diagram refer to the earnings of the railroads from the year 1912 
to the year 1920, the lines on the right to the earnings of the Stone & 
Webster companies for the same years. Each line is divided into three 
parts — the cross-hatched portion shows the percentage of gross 
earnings required for operating expenses, the solid black the percentage 
required for taxes, and the open section the percentage of gross earn- 
ings remaining for replacement and reserve funds and for distribution 
to stock and bond holders. Before the railroads were taken over by 
the Government, operating expenses and taxes consumed about 72 per 
cent of gross earnings, leaving a balance of about 28 per cent for 
reserves and distribution to security holders; in 1917 this balance 
dropped to 26.2 per cent, in 1918 it was 15.5 per cent, in 1919 11.2 
per cent, and in 1920 3.4 per cent. Expenses had by this time 
increased until they consumed almost the entire gross earnings. 
This was not due to any decrease in gross earnings for these were $3,597,- 
000,000 in 1916, and had risen to $6,171,000,000 in 1920. It was due 
entirely to an increase in operating expense. Wages of employees alone 
in 1920 were greater than the total gross earnings of 1916. Now look at 
the Stone & Webster group. Up to 1916 the balance remaining after 
paying operating expenses and taxes was about 42.5 per cent of the gross 
earnings; it fell off slightly during the next few years, but was never 
below 35.4 per cent, and in 1 920 the corner was turned and it was back to 
37.1 per cent. A more striking example of the waste of Government 
operation and the savings of efficient private operation would be hard 
to find. 

Our Future Must be Built on Confidence 

We have considered the record of the past; now just a word as to 
the future and then I am through. We have made a wonderful showing, 
and merely looking at the figures might make us think that everything is 
rosy, but it isn't. We've got lots of troubles ahead of us still, and you all 
know that. We're going to have a hard time to hold what we've gained 
during the war. We're going to find it very difficult to finance these 
properties during the next few years. It's going to be particularly hard 
at first; then there will be a gain, but it's going to be a slow gain. We've 
got to restore the confidence of investors in utility securities; we've got 
to reach a new security market, a new class of security buyers. With 
the present tax situation, we cannot hope to sell securities to the Wge 

26 



investor to whom we sold many of them in the past. The large investor 
cannot afford to buy securities and pay taxes on them under present 
conditions. He must put his money into non-taxables. We've got to 
reach out to a much larger group of security holders and security buyers 
and obtain our money from that source, and as an incident to that we 
must obtain capital from our local communities. That we are already 
doing. We believe that is a field which will be very helpful from every 
point of view. We will not only gain money for our needs, but will have a 
group of local security holders who will have an interest in the property 
and should be a tower of strength to help us solve our local problems. 
We are going to have difficulty in maintaining our rates and the increases 
in rates that we have secured. We are going to have even more difficulty 
in getting further increases in rates that we must have in some instances. 
So the problem before us is no cinch. 

On the other hand, I want to call your attention to the fact that Stone 
& Webster went into the public utility business because it was in a bad 
way. At the time they went into the business, the investors who had 
their money in it were thoroughly discouraged; they saw no reasonable 
outlook for a fair return on their investment or the recovery of their 
capital. Stone & Webster had the courage of their convictions and 
stepped into that situation, and through it they made their success. 
That is what we are facing right this minute, and we have the same 
opportunity or a greater opportunity than they had at that time. There 
is no question whatever as to the future if we have the courage and the 
ability to take advantage of the situation. These companies are going 
ahead, they are going to grow, and they are going to grow at a rate which 
will surprise us. I expect that it will be possible twenty years from now 
to point to figures showing the growth of those twenty years which will 
make the figures of the last twenty sink into insignificance. These com- 
panies will go ahead because of increase in population and because there 
will be a growth in the use of these facilities surpassing all that we have 
seen before. This is particularly true in the light and power field. In 
the early days it was almost entirely a lighting business; power was 
confined solely to small motors. The generating units in our power 
stations were little, if any, more efficient than the units that might be 
put in a large mill. In time we were able to correct this. With the 
coming of the steam turbine we got a big boost and secured an advan- 
tage which put us a long way ahead of the individual mill or factory. 
We haven't been able to take full advantage of this as yet, but it will 
come gradually and sooner or later the central station will supply 
practically the entire power requirements of the community. The gas 
industry is also going ahead; it has its own field of usefulness; it will 
not grow as rapidly as electric power, but it will, I believe, have a steady 
growth in the future as it has had in the past. 

The Street Railway is the Real Problem 

The street railway is the real problem, a problem concerning which 
people are sometimes very pessimistic. I want to give you this thought. 
We always speak of ourselves as being in the street railway business and 
usually have in mind only the electric railway. When some other form 
of urban transportation is suggested a shiver runs down our spine and 
we wonder whether we are to be driven from the field. Let us chcmge 
our point of view and, in the future, let us always say: We are in the 

27 



transportation business. True we are at present operating electric 
railways, but our business is to furnish transportation. The method may 
change from time to time, but if it does we are prepared to meet the 
situation; if any new and more efficient methods are devised we are 
prepared to adopt them and continue our service to the public. 

Personally I believe that we are going to operate electric railways 
for the next twenty-five years and then for an indefinite period after that. 
There is nothing in sight, so far as I can see, to take the place of the urban 
electric railway except in small communities or in outlying districts of 
larger communities. I think we may to advantage use other forms of 
transportation to supplement our street railway service, but I think this 
will be only in territory where travel is light. When the traffic increases, 
electric railway service will be substituted. In all cases the backbone of 
our system will continue to be the electric railway. But suppose I am 
wrong. Suppose, for example, that electricity is to be superseded by 
some other form of power. Still I believe we will operate on tracks 
because I believe that is the only way that adequate service can be given 
in an urban center. We will simply chzinge over our motors or our rolling 
stock and use the new source of power, whatever this may be. But 
suppose I am wrong again. Suppose that tracks have outlived their 
usefulness and are to be abcmdoned. Still I would say: We are in the 
transportation business and we should furnish service in whatever way is 
most efficient, whether it be by motor cars, by trolley busses or by aero- 
planes. I say this because I am satisfied that there must always be some 
systematic 2ind coordinated method of urban transportation. The people 
must be carried back cind forth between their homes, their business and 
their places of amusement. That is a necessary feature of our modern 
life that cannot be done away with. It must take place in some form. 
To have that service satisfactory and economical it must, in my judgment, 
be conducted by some single organized system. Competition in public 
service has been shown repeatedly to be extravagant and wasteful. In 
the early days there was competition between horse car lines and later 
between electric railways, but this was economically unsound and gradu- 
ally disappeared. As I told you a few minutes ago, we bought eleven 
street railways in the city of Seattle and we combined them into a single 
efficient property. We bought them because eleven street railway proper- 
ties could not exist in Seattle and properly serve the public. What has 
been true of horse car lines and of electric railways will be true of any 
future method of transportation. Good service and efficient operation 
will comp)cl a unified system. 

Then take that other bugaboo, municipal ownership. We have just 
seen how the Government came out with the steam railroads. You know 
and I know that municipalities in a democracy can never successfully 
operate street railways. There may be sporadic attempts, as there are 
now in Seattle and a few other cities, but this will pass. Sooner or later 
these properties will return to private operation as did the Philadelphia 
municipal gas plant. Already the difficulties of these cities are becoming 
known, and today it would be pretty difficult to sell a street railway to a 
city. Most cities do not want them at any price. 

Our problem then is to keep abreast of the times, to be familiar with 
every improvement in the art of transportation and to apply these 
improvements to our properties whenever this will produce better service 
or more t>^cient operation. 

28 



If we are open-minded and alive to our possibilities, if instead of 
fearing improvements we are quick to seize and apply them to our own 
use and the service of the public, we need have no anxiety for the future. 

I am sure that we may at this time face the public utility situation 
with optimism. Notwithstanding all the troubles and all the difficulties 
that beset us during the war, notwithstanding all the difficulties that we 
know are ahead of us, the outlook for the industry today is better than 
when Stone & Webster had the courage to go into it in '93. We have an 
opportunity to develop and extend these properties in a way that is far 
beyond anything that could have been imagined at that time. There 
are unlimited possibilities before us. It is our business to transform 
those possibilities into fact, and that is what we are going to do. 

I thank you. 



29 



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D 

HUSETTS ELECTRIC COMPANIES 

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EXPENSE PER K W H SOLD 


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37 



MISCELLANEOUS DATA 



Financial Data. 

Public Utilities unpeb Stone & Webster Management 

GAPITALIZAtfON 1904 1920 

Total Face Value r.73.OOO,OOQ00*2l9.00Q00O.0O 

Debt per Dolter of Gross ^.3.50 *.2.60 

Stock per Dollar of Gross .f .ASO. ^.280 

Total per Dollar of Gross .f..8.00...........l5.40 

EARNINGS 

Gross Earnings .^9.500,000 ^40.500,000 

Operatin9 Expenses and Taxes.. 6,200,000^ 25.500.000* 

Net E?mln9s 3.300000 15.000.000 

Fixed Char9es .1.600000 650Q000 

Balance, 1.700.000 8.500000 

Dividends .600000 3.50QQ00 

Balance for Reserves and Dep .1.100.000 5.00Q000 

* Operating Ratio 65.3% 63/^ 

Financing From Earnings During War ^ 

Balance after Charges 5 Years ending I92Q...35,00Q000 

Paid out in Dividends 15,000.000 

Invested in Properties 2Q00Q000 



40 



Operating Data 

Public Utilities under Stone & Webster Management 

General 1900 1920 

Number of Companies 10 43 

Population Served .643,000 3910000 

Earnin9s per Capita P.4.64 * 6.98 , 

Power 

Kilowatt Capacity Stations 14,239 443.252 

K.W.H. Output 35,000,000 1,834.000.000 

Tons Coal (other fuel equated) 58,600 747,300 

Lbs. Coal per KWIi 8.76 3.08 

Railway 

Miles Track 133.8 1,032.4 

Car Miles 5,300.000 49,100.000 

Light a power 

Number Customers 8.950 199,100 

K.WH Output.. 22.700,000 I.79Z 000.000 

K.W Connected Load :..I5,800 700,000 

Oross per K.W.H (cts.) 5.63 3.49 

6aS 

Miles of Mams 819 

Number of Meters 97000 

Thousand Cu Ft Made -0 2.800.000 



41 



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Public Utilities under Stone & Webster Management. 



42 



Stone & Webster, Inc. 
Engineering and Construction 

work done 

1900-1921 
Steam Power Stations 

Kilowatts Installed. 710,000 

Steam Turbine Jobs 63 

Number Turbines Installed 86 

Number Boiler Installations - 124 

Number Boilers Installed 308 

Hydro Electric Developments 

Total Horsepower Installed 556.000 

Total Horsepower Ultimate Development.. .969.000 
Number of Developments 15 

Total Cost of Work Done....623,000,000 

Cost of Work for Companies under ^ 
our Management included in above ... 75,000.000 



43 



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stone & webster, inc. 

Steam and Water Power 

Plants Constructed 






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44 



Jjl^RARY OF CONGRESS 

019 713 344 2 • 



